COINBASE for Crypto has come

[Clinamenic]

Well if a stablecoin proves to be reliable, and accepted widely throughout the ecosystem, a supply of them can be sold for dollars, in an off-chain deal. That is, a financial institution can work out a deal with a stablecoin issuer, and give the issuer a bunch of dollars off-chain and receive a bunch of stablecoins on-chain.

And if the stablecoin issuer wanted to, they could use those dollars as a liquidity pool, to function as a market maker, and charge fees for other big institutions to access its liquidity.

 

[vimothy]

lets say I'm a crypto bank like nexo. I promise you one dollar. I need to get that from somewhere. I borrow that dollar from a real bank. I lend it to you. you pay it back to me. i pay it back to the originating bank.

 

[vimothy]

Well if a stablecoin proves to be reliable, and accepted widely throughout the ecosystem, a supply of them can be sold for dollars, in an off-chain deal. That is, a financial institution can work out a deal with a stablecoin issuer, and give the issuer a bunch of dollars off-chain and receive a bunch of stablecoins on-chain.

no that's liabilities on both sides, that doesnt work

 

[vimothy]

if I issue dollar liabilities off chain, I expect a flow of dollar payments ie a loan

 

[Clinamenic]

no that's liabilities on both sides, that doesnt work

But what if the stablecoin itself isn't backed by anything? Is it still considered a liability if no entity is obligated to exchange it for a dollar? Or what if this obligation is distributed, i.e. the responsibility is spread across everyone operating a stablecoin/dollar trade pair?

Ultimately, I lack answers as to the operations of stablecoin issuers in general (and I gather everyone does for Tether in particular).

 

[Leo]

 

[william_kent]

View attachment 10912

is that a J H Prynne poem?

As if Prynne has discovered sudoku. The 4 grids can make up a cube if you want, lines can be followed on all sorts of trajectories through 3D revealing magic squares - sections and diagonals form little sequences, possible groups and sets and series that prove to be, like every proper puzzle, full of blind alleys and wrong turns, you think you have caught a trail in the spellings or sounds of successive words, or their meanings or taxonomies, or some other common facet, and it almost fits but then peters out, but you spotted a different route instead and that too turns out not to rhyme properly.

 

[vimothy]

how tether works at an abstract level is like this. I'm tether and I issue an instrument called USDT, which I announce is pegged to the dollar at par. in order to support this peg I back USDT one-for-one with dollars and only issue new ones when someone buys them for dollars. eventually I realise that having a big pile of cash sitting around doing nothing isn't actually profitable business model, so I decide to buy some high-grade liquid debt with it. then I realise that all of my assets don't need to be highly liquid, bc the prospect of all my customers asking for their money back at the same time is very unlikely. so I can move some of my portfolio into longer term, less liquid and maybe more speculative stuff (crypto, for example) with a higher yield, but keep enough lliquid assets to meet the cashflow demands of my depositors. then it occurs to me that I don't need to wait for dollars to come in to buy the speculative assets, if those assets are crypto, since I can pay for them with USDT. So I can expand my balance sheet at will, issuing new tethers and using them to by existing crypto assets. finally, I realise that I don't need to wait for existing assets to come about, I can simply make loans of USDT to trusted counterparties and create the assets myself. if the price of USDT falls, I just sell some of my assets for USDT, pushing the price back up. ta-da, I've become the bank of tether, the central bank of the crypto economy.

 

[Clinamenic]

how tether works at an abstract level is like this. I'm tether and I issue an instrument called USDT, which I announce is pegged to the dollar at par. in order to support this peg I back USDT one-for-one with dollars and only issue new ones when someone buys them for dollars. eventually I realise that having a big pile of cash sitting around doing nothing isn't actually profitable business model, so I decide to buy some high-grade liquid debt with it. then I realise that all of my assets don't need to be highly liquid, bc the prospect of all my customers asking for their money back at the same time is very unlikely. so I can move some of my portfolio into longer term, less liquid and maybe more speculative stuff (crypto, for example) with a higher yield, but keep enough lliquid assets to meet the cashflow demands of my depositors. then it occurs to me that I don't need to wait for dollars to come in to buy the speculative assets, if those assets are crypto, since I can pay for them with USDT. So I can expand my balance sheet at will, issuing new tethers and using them to by existing crypto assets. finally, I realise that I don't need to wait for existing assets to come about, I can simply make loans of USDT to trusted counterparties and create the assets myself. if the price of USDT falls, I just sell some of my assets for USDT, pushing the price back up. ta-da, I've become the bank of tether, the central bank of the crypto economy.

And there may not even be any non-trivial cases of prices falling. For stablecoins, you only see price fluctuations around the order of 0.01%, and even that should be stabilized further.

But yeah as you just explained it, it could work that way, as far as I know. Or some way similar to that.

 

[vimothy]

it's highly unlikely that the majority of tether's assets are treasuries or even high grade corporate debt. it's obviously majority backed by crypto

 

[vimothy]

specifically, by loans to crypto institutions like alameda research

 

[vimothy]

which they use to run crypto exchanges

 

[Clinamenic]

which they use to run crypto exchanges

And it seems to be working, but I'd just like a better sense of what kind of constraints Tether has in terms of issuance. If USDT supply is backed up by other crypto assets, which I suspect but I forget if that Protos paper provides evidence of, then its much more likely that there will be periods in which the total supply of USDT exceeds the total value of whatever is backing it up, no?

And really this is more of a problem when there is a lack of adoption of USDT as an accepted payment method. That is, if USDT isn't widely accepted, it becomes more illiquid in the sense that funds held in USDT would need to be converted to dollars in order to be spent.

 

[Clinamenic]

Also, if stablecoins can be backed up by other dollar equivalents, what is to stop the major stablecoin issuers from just minting new supplies and exchanging them for each other?

 

[vimothy]

tether has no constraints in terms of its issuance. it can create USDT out of whole cloth, and use it to purchase the cypto assets which back it, or use it to make the loans to exchanges which back it

 

[vimothy]

Also, if stablecoins can be backed up by other dollar equivalents, what is to stop the major stablecoin issuers from just minting new supplies and exchanging them for each other?

nothing is preventing that, although it's probably not very profitable, since they have zero yield. better to issue in exchange for a promise to pay back more

 

[Clinamenic]

nothing is preventing that, although it's probably not very profitable, since they have zero yield. better to issue in exchange for a promise to pay back more

Well what if two stablecoin issuers exchange newly issued supplies, and they each deposit each other's tokens at something like Nexo, to earn 10% APY?

 

[vimothy]

seems like a lot of effort, but maybe, yeah. assuming nexo are happy with that.

 

[Clinamenic]

seems like a lot of effort, but maybe, yeah. assuming nexo are happy with that.

Seems like it would all depend on what volume of borrowing is going on at Nexo, i.e. if they had enough interest revenue to accommodate massive stablecoin interest-yielding deposits

 

[Clinamenic]

At my level, I'd be getting 10% on stablecoins. But if I had $20,000,000 worth of USDT, maybe Nexo couldn't afford to pay me 2,000,000 USDT annually. More than that actually, taking variable compounding rates into account.